The Mobile Payments Fustercluck

It seems that every week there’s a new company, startup, or financial institution that is launching a new way to pay from, issue rewards, or power transactions from a mobile phone. The question that always lingers in my mind when I see yet another mobile payments service pop up—how many more ways do we need to pay for a physical or digital product via a mobile device?

Matrix Partners’ Dana Stalder, who was the former COO of PayPal, says that he is introduced to at least one mobile payments startup a week. Matrix Partners previously invested in mobile payments company Zong, which was acquired by PayPal in 2010. “There has been a lot of innovation around payments over the course of the last three to four years. But with recent growth in smartphone penetration, there has been a huge pop in the number of mobile-related payments companies,” Stalder explains.

Thomas Husson, an analyst covering the mobile payments for Forrester, agrees. “Mobile is opening a bridge between a physical and digital worlds because these devices are in everyone’s pockets,” he explains. “Mobile payments is a very fragmented industry there are so many different subcategories when it comes to payments.”

You may know the major players in the mobile payments race, but what is it that will give staying power to these competing technologies? There’s Square, which offers both a consumer application to pay for goods, as well as a merchant platform to accept credit card payments via your mobile phone. PayPal wants in with both its digital wallet offering, as well as PayPal Here, which like Square, allows merchants to accept credit cards via a dongle that attached to a smartphone. Add to that Square competitors VeriFone and Intuit GoPayment. iZettle, mPowa, and a Square clone from the Samwer brothers are all trying to take Square’s scale to Europe.

There’s NFC-based Google Wallet, and every credit card company, including American Express (via Serve), Visa (V.me) and MasterCard (PayPass). Isis is a carrier-led joint venture between AT&T, T-Mobile and Verizon that aims to create a mobile wallet in devices. The players above all want to create the one mobile wallet to rule them all (as does PayPal), which would allow you to pay for physical and digital transactions via your mobile phone.

Just listing them is exhausting. And we haven’t even touched the ever-growing number of startups that are playing in the space as well. Jumio wants to power payments for retailers, and is eying a play in the mobile wallet space. BrainTree and Dwolla are also trying to take on the payments industry with its mobile offerings for developers and online businesses.

Also worth mentioning: Kuapay,Placecast, Boku, AisleBuyer, ZooZ,LevelUp, Groupon, and Shopkick, which all are dipping their toes into the mobile wallet pond in various ways.

Then there are the retailers. Starbucks has its own mobile payments app. A number of retailers, including Target and Wal-Mart are banding together to form their version of a mobile payments platform.

Of course, Apple’s Passbook could be entering this arena. Passbook doesn’t seem to be a full-fledged wallet-yet — it hasn’t even launched. But airlines are already starting to integrate with the technology to allow users to access their boarding passes.

While not all of the players mentioned above are directly competing with each other, it’s clear that they’re after a very similar end goal – making offline payments more seamless.

Stalder agrees “Offline payments, which represents trillions of dollars has generally been a closed platform but the mobile phone is changing this.” He believes that as larger players look to expand their services and offerings to consumers, we’ll see a consolidation in the space, and some of the smaller startups will become acquisition targets. “It’s going to be hard to outwallet Google or PayPal.”

I think it’s safe to assume that there will be more than one clear-cut winner in the mobile payments/digital wallet race, but we will see consolidation. From the user point of view, a consumer is going to get frustrated very quickly if he or she has to use 10 different apps to pay for items.

So who’s going to win?

One argument is that it’s going to be the company or startup that can reach the most amount of consumers, in a short amount of time, with the least amount of friction. As Stalder predicts, “he who owns the consumer relationship holds the power.”

But scale itself amongst consumers isn’t the only defining factor in who is going to come out on top, contents Husson. He believes the winner’s offering is going to be all about convenience. “The mobile payments company bring value to consumers and merchants beyond just payments. Before payments, during payments and after payments,” he says.

Already, existing services like Square are becoming more full-service, expanding beyond the transaction for consumers. Square has bet heavily on loyalty features for consumers, including hands-free payments, digital punch cards and more.

SoftTech VC’s Jeff Clavier, who was an early investor in Card.io, thinks it’s not a one winner takes all opportunity. He thinks that banks, credit card companies, and others will have separate solutions.

While consumer adoption is key, you can’t discount the value of the merchant relationship as well. I believe that the company or startup that commands the best value for both consumers and merchants will become the clear-cut leader. That’s easier said than done. Square is trying to corner the market on local and independent merchants, but also just landed a massive deal with Starbucks. PayPal has now integrated with a number of big-box retailers, including Home Depot and Jamba Juice, but it’s unclear how these point of sale implementations are faring (and if consumers are actually choosing to use PayPal over swiping their credit cards). Google faces the whole NFC-challenge, and until the technology becomes more widely adopted, it’s a tough sell for merchants.

Clavier highlights the challenge that payments companies face in building good relationships with both developers and merchants. “Your fees have to be competitive…it’s a struggle for a big company to get scale, and it’s daunting for startups.”

That leaves Apple, which could be a major player in the mobile wallet/payments race if the company invests in creating such a product. The reason why Apple is such a threat in mobile payments is because it has an enormous amount of personal data (by way of credit cards from iTunes purchases). According to recent reports, Apple has 400 million active accounts in iTunes with credit cards.

But Stalder maintains that “Apple is not a payments company and will never be a payments company.” He adds that “Square has a good shot at this but needs to figure out the consumer side.”

I agree that Square is positioned well—but PayPal is fighting hard to nail this (and already has well over 100 million active users of its traditional digital payments product), and could leverage this to target both merchants and consumers. entrants like Apple could be game-changing.

Square and others need to figure out both sides of the marketplace, because a mobile payment is ultimately a more seamless transaction between a merchant and its consumer. Whomever cracks that ecosystem unlocks trillions of dollars of value — and a ton of competition.